For centuries, human communities have used gold as money and standard of value. Recently it began to be traded in exchanges through the Gold Exchange Traded-Fund or GETF. But investors are yet to consider it a serious investment option. The gold ETFs are delivering 8 percent returns since August, despite Sensex showing extreme volatility.
The trend is expected to continue for a couple of months. But that hardly moves investors. Confusion, lack of knowledge and unpredictability are some reasons for gold ETF not pickling up as an investment option in India, market pundits say. The idea of gold ETF was first officially conceptualized by Benchmark Asset Management Company in India when it filed a proposal with the SEBI in May 2002.
However, it did not receive regulatory approval and was only launched later in March 2007. The first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange.
The idea is to give investors the ability to own gold and make profit from the price variation, without the inconvenience of storing actual gold. Market experts say people investing in gold ETF should think differently from other commodity investors. One shouldn't judge gold ETFs on the performance parameter. It must be perceived as an asset class and a hedge against currency fluctuations.
Know the game Gold ETF typically is an exchange-traded mutual fund listed and traded on a stock exchange. Gold is the underlying asset for the units of that fund. Every unit of that fund represents a small quantity of pure gold and the traded value of that unit moves in tandem with the price of gold actual market. Normally, a mutual fund company launches gold ETFs.
Any mutual fund company launching such as fund appoints authorized participants (APs) who buy the units of gold ETF from the mutual fund by exchanging actual pure gold for the units they buy. These APs facilitate secondary market through the stock exchange, where investors can buy or sell gold units on payment, for quantities as small as one unit. The gold is held by the mutual fund company. Authorized participants can go back to the mutual fund house to redeem the gold ETF units in actual pure gold at any time.
Why invest in paper gold? Investing in gold ETF helps an investor avoid all the disadvantages of investing in physical gold such as the cost of storage, liquidity and issues of purity. Gold ETFs conform to rigid regulations on investment and assures 0.995 purity of gold. And then, gold ETF allow investment in gold in small denominations, helping the retail investor to participate. Shares are sold in gold units of approximately one gram. This enables the investor to accumulate units, benefit from coast difference.
The units can be redeemed either from the fund directly or from the market. Besides, it gives investor tax advantages. Capital gains in gold ETF units are tax exempt if held for more than one year, whereas capital gains in physical form is exempt